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Sunday, August 5

5th Aug - Weekender


Not much material, so only one Weekender-post. Views: Euro crisis to drag on, risk markets bullish for the early part of the week, but I am expecting a reversal around mid-week: stock markets are still in a modestly rising but wildly sawing channel, and we’re near the upside again. If I had to trade, cautious longs on Monday, flat after a day or two, and prepare to get long during the possible correction. See the Special: ECB WATCH for more.


Previously on MoreLiver’s:

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EUROPE
The global crash: Japanese lessonsThe Economist
After five years of crisis, the euro area risks Japanese-style economic stagnation

Jens Weidmann: 55 years for stabilityBIS (pdf)
Interview with Dr Jens Weidmann, President of the Deutsche Bundesbank, and Helmut Schlesinger, former Bundesbank President, published in the staff magazine of the Bundesbank on 27 July 2012. (Bundesbank did in fact break the ERM in the early nineties, just as I have said previously)

One Money, (Too) Many MarketsProject Syndicate
The euro was not created for purely economic reasons. If it is deemed a worthwhile project for political reasons, and is viewed as mutually beneficial to all participants, the eurozone could be made a viable venture – though certain minimal structural conditions must be met.

5 People You've Never Heard of Who Are Screwing Up Europereason
With the euro-crisis threatening the economies of Europe, the United States, and Asia, the usual suspects are coming up for blame. Bankers and corrupt regulators face scorn from the left and much of the right. Yet those perhaps most responsible for the world's dismal economic future have names many would not recognize. Indeed, the people who have done the most to screw up Europe would be able to walk down almost any street in the world without being recognised. It's time to meet them!

EUROPE: PIIGS
JPM Says To Short Spain 10 Years Until 7.75%, Forcing A Spanish Bailout RequestZH

S&P Downgrades 15 Italian Financial Institutions, Says Country Faces Deeper Recession Than Previously ThoughtZH

In Order To Be Saved, Spain And Italy Must First Be Destroyed ZH
Citigroup’s long note. Spain and Italy require 700bn for a two-year programme.

EUROPE: ECB
Maybe Draghi’s speech wasn’t a disaster after allWonkblog / WP
Jens Weidmann, the German representative on the ECB board, was the lone dissenter from the new bond-buying proposal. And Weidmann couldn’t get any of the other members to agree with him.

No left tail for a whileThe Tail Chaser
To watch are the same variables: Target2 Claims, Deposit Flights and banks’ equities and credit. These are the ‘convertibility premia’ Super Mario pulled as excuses to get the bond buying within his mandate.

What’s with the eurozone update?Marginal Revolution
He’s daring the Germans to zap him, knowing he stands some chance of going down in history as the central banker who saved the eurozone, knowing that he has nowhere else to go, knowing the Germans have nowhere else to go, and knowing that he has nothing to lose from being fired or otherwise emasculated.  He also knows he has a lot of other eurozone nations on his side.

The Great Draghi Re-thinkalphaville / FT
Oppenheimer is very much looking for the sort of rally we saw post-LTRO, although he accepts it could be volatile. But Goldman are telling their clients to go long European “high sales growth” and short the American equivalent, while also targeting a dollar/euro rate of 1.30.

Mario Draghi's rescue plan for the euroFree exchange / The Economist
Backing up words with more words is always a problem, particularly when there are so many moving parts, as in the euro area. In an ominous sign, Spanish 10-year bond yields climbed back above 7%. Now they know what Mario really meant, the markets may remain unconvinced until his plan actually takes off.

ECB JudoMacro Man
So this leaves TMM reluctantly agreeing with the consensus view that markets will try and force Rajoy to ask for EFSF help. And while it might seem too obvious, especially given that the Draghi Put lies below, the framework he laid out yesterday will take some weeks to come to fruition (notably, the German Constituional Court ruling on ESM). That is not to say that the ECB will be unable to act until late-September, however. More that without substantial pressure on Spain & Italy, that it cannot be pre-emptive.

What did you really expect from the ECB?Humble Student
The ECB is prepared to give the politicians cover to rescue the euro, but there is a quid pro quo involved. Don't expect immediate action, but this will be the normal back-and-forth of a negotiation process that will drive the markets crazy.

Draghi Continues Handwaving as EuroCrisis Worsensnaked capitalism
The problem is that Draghi has to keep the markets appeased until September 12, when the German Constitutional Court will presumably lift the injunction against having the German president sign the treaty that creates the permanent rescue fund, the ESM (my connected German buddies believe the judges are just about certain to lift the injuction, even if it were to take some tortured reasoning to get there). The second obstacle that has to be overcome is that Spain and Italy have to ask for aid. Why is that necessary? Because formal aid comes with strings attached.

Draghi'ing his heels: thoughts on the ECB, MPC & FOMC this weekSaxo Bank
I am sympathetic to the argument that until the measures are firmly put in place, the resultant uncertainty is negative for sentiment and for the EUR and broader risk assets BUT if all of these suggestions and commitments eventually pass through into physical measures then they would potentially amount to the ‘bazooka’ of policy that the markets have been craving for months (if not years).

Hedge-Fund Investor Jen, a Euro Bear, Gives Draghi Thumbs UpMarketBeat / WSJ
Stephen Jen is a pronounced euro bear, but he gave a ringing endorsement of Mario Draghi’s new game plan for the euro zone’s debt crisis Thursday, even as markets were disappointed


MARKET VIEWS
CommoditiesUBS / FT Long Room (pdf)
Strategy Matters Goldman Sachs / FT Long Room (pdf)
A clearer path to a lower risk premium: The lack of immediate concrete action in today’s ECB announcement led to a sell-off in markets. Near term, this volatility could continue. But, on a slightly longer horizon, the path that the ECB has set out is likely to lead to lower perceived tail risks by equity markets and therefore a lower risk premium. (free registration required)

JPMorgan's Tom Lee: One Of The Best Stock Market Indicators Has 'Decisively Turned Up'BI
Economic surprise index has been picking up.

HIGH FREQUENCY TRADING
Raging Bulls: How Wall Street Got Addicted to Light-Speed TradingWired
Wall Street used to bet on companies that build things. Now it just bets on technologies that make faster and faster trades.

Interview With A High-Frequency TraderZH
HFTs can model other traders’ behavior. When someone trades through Scottrade or Interactive Brokers, their order has a unique number attached to it – the same number every time a client places an order. This number is bundled with all relevant trade information (time, price, etc.) and sold as an encrypted “enhanced data feed.” An HFT can then use those past results to predict the trader’s behavior.

TRADING
SNB-central bank or hedge fund?James Saft / Reuters
Switzerland on Tuesday revealed its foreign exchange reserves now total 365 billion francs ($374 billion), a rise of 50 percent in just three months and taking it to a dizzying 62 percent of Swiss annual output. A small Alpine country with a big banking industry is now the world's sixth-largest reserves holder, behind only much larger or resource-rich countries like China, Japan, Russia and Saudi Arabia.

Post Hoc Ergo Propter HocAbove the Market
data-mining in the investment world — leading to claims of fancy-sounding “proprietary models” and “black boxes” – can also be a highly questionable endeavor. The markets produce so much data that coincidence alone accounts for many systems which backtest successfully

Sorting Countries on ValueMebane Faber
a great article “The Hedgehog’s Error” on Morningstar that does a simple quant sorting of global countries based on value (P/B).  Not surprisingly he finds that sorting on value, aka buy low sell high, works.  More importantly he unveils a database of French Fama international data on a country level basis

Artificial Intelligence: The Answer to Wall Street’s Data DelugeInstitutional Investor

Asset Allocation and Portfolio Management: Is the Industry Shifting to a New Paradigm?CFA Institute
The traditional asset management approach may have worked in the 1990s, during what proved to be an exceptionally long period of stability. But clearly it has not worked in the past 15 years.

How to Get High Returns From High Volatility StocksFalkenblog
Such research confirms my thinking that prejudices are more important than statistics when analyzing complex data, because people tend see what they believe rather than vice versa. Thus, developing good prejudices is more important than developing good econometric skills

Risk Premia Harvesting Through MomentumTurnkey Analyst
this paper explores momentum with respect to what makes it most effective. We do this by first combining cross-sectional relative strength momentum with time series momentum. We then explore the factor most rewarded by momentum… Diversification is considered the only free lunch in the investment world. This paper suggests that momentum is probably the other free lunch.

OFF-TOPIC
Engineers Unveil First Casimir Chip That Exploits The Vacuum Energytechnology review

The Porn ConventionForbes

Book BitsThe Capital Spectator

Meet the Man Who Put the ‘@’ in Your E-MailWired

Extra-terrestrial life: Closer to encounterThe Economist
As the latest rover arrives on Mars to assess its hospitality, astronomers are learning more about possibly habitable worlds beyond the solar system

The HereticThe Morning News
For decades, the U.S. government banned medical studies of the effects of LSD. But for one longtime, elite researcher, the promise of mind-blowing revelations was just too tempting.

30 open questions in physics and astronomyLocklin on Science